Corporate Bond Defaults Up Sharply in '89

By RICHARD D. HYLTON

Published: January 11, 1990

Correction Appended

Defaults on corporate bonds more than doubled in 1989, according to an investor research company that tracks the fixed-income markets.

The Bond Investors Association, a nonprofit research organization based in Miami Lakes, Fla., found that the defaults were up 136 percent last year in dollar value, totaling $11.70 billion for 47 bond issues. That compared with $4.96 billion in 1988, for 36 bond issues.

The increase was attributed largely to troubled high-yield, or ''junk bond,'' issues, many of which were used in leveraged buyouts that later fell apart.

''The market shrank in terms of net issues, but the defaults increased,'' said Richard Lehmann, president of the association. The high-yield market saw only $51 billion in a total of 250 new issues last year, down 15 percent from 1988.

Mr. Lehmann said the junk bond market and the Federal Government's move to force savings and loans in difficult straits to sell their junk bond portfolios caused the secondary market in these securities to expand rapidly.

''A tremendous amount of junk bonds hit the secondary market and that caused the appetite for new issues to shrink significantly,'' he said. Many investors seeking attractive buying opportunities went into the secondary market to find them, and a number of scheduled high-yield issues had to be scrapped when investors showed little interest.

Among the largest junk bond issues that went into default last year was that of Hillsborough Holdings, the holding company for the Jim Walter Corporation. Jim Walter was taken private in 1987 in a leveraged buyout by Kohlberg, Kravis, Roberts & Company, the leading leveraged buyout firm. Hillsborough defaulted on $2.19 billion worth of bonds and on Dec. 27 filed for Chapter 11 bankruptcy protection.

Other big defaults were by the Southmark Corporation and Integrated Resources, at one time two of the country's largest sellers of real estate partnerships. Southmark defaulted on $1.8 billion of bonds and Integrated defaulted on $671 million. Both companies filed for Chapter 11 bankruptcy protection.

Among the other major companies that defaulted before filing for bankruptcy protection were Eastern Airlines, which defaulted on $1.1 billion, and Resorts International, the hotel and casino operator taken private by Merv Griffin. It defaulted on $925 million.

Higher Default Rates Expected

Mr. Lehmann of the Bond Investors Association said the group expected to see even higher default rates in 1990.

''While $11.7 billion seems high by historical measures, it is less than the $15 billion we expect to see in 1990,'' he said. ''The excesses and abuses of the junk bond market, which began in late 1985, are with us still in the form of poorly structured businesses trying to support impossible debt loads. Until these companies are restructured, which usually requires a default, the default rate for the junk bond market will remain high.''

A preliminary count of defaults in the municipal bond arena totaled $770 million last year, but the association expects it will reach $1.1 billion, up about 11 percent from 1988, when the final numbers are tabulated. Mr. Lehmann said the increase just about kept pace with the growth of the entire municipal market.

''Municipal defaults have been consistent at about 1 percent of the new-issue market volume for several years now,'' he said.

Defaults in the municipal area were concentrated in nursing home, hospital and housing development bonds, and that pattern is expected to continue this year.

Among the largest issuers that defaulted on municipal bonds last year were Arizona State's St. Luke's Hospital and the Philadelphia Metropolitan Hospital. The first involved $80 million and the second $56 million.

The organization noted that for the decade of the 1980's about $36 billion in corporate bonds and $8 billion in municipal bonds went into default, affecting holders of more than 6,000 different bonds.

Correction: January 12, 1990, Friday, Late Edition - Final An article in Business Day yesterday about an increase in corporate bond defaults in 1989 misstated the financial situation of Integrated Resources Inc. The company is seeking to reorganize itself but has not filed for Chapter 11 protection under the bankruptcy laws.